Getting to Zero Employment: Why “full employment” policies actually limit employment and output

by Jehu


In the first two parts of my post (here and here), Getting to zero employment, I tried to establish three important points:

First, mainstream economic policy-makers admit the tools they use to ensure so-called full employment are of limited effectiveness. These tools are effective only insofar as they add to output, defined as an increase in aggregate prices of production of all the commodities produced during a given period, aka GDP. Efforts to expand employment beyond this limit by conventional policy measures add to prices, but add nothing to real output. A simpler way to say this is that conventional policy measures produce inflation, but do not increase the production of real goods — cars, houses or shoes. The point where conventional policy fails has been called NAIRU: non-accelerating inflation rate of unemployment: However, NAIRU is not an actual number, corresponding to some definite level of unemployment — like 10% or 5% or even 1% unemployment. Rather, it is a theoretical construct, a crutch, employed by simpleton economists to explain why, at some point, conventional policy fails.

Second, mainstream economic policy-makers admit the tools they use to ensure so-called full employment leaves a huge population of unemployed wage workers — perhaps 100 million or more — unable to sell their labor power. At the same time they insist (to one degree or another) that in our society the normal expectation is that each person must earn wages to access the means of life. The state can step in to offer limited support to “the deserving poor”, like those who, through no fault of their own, are laid off from a job, but the state should not be in the business of providing long-term, permanent income in lieu of a job.

Third, it is characteristic of the American system that the social safety net is meager and leaves the huge population of unemployed in dire economic straits. The American state will literally watch its citizens die on the streets without intervening. Some might find this indifference disturbing, yet they are only moved by the extremity. They never question the fact that the mode of production itself is premised on this extremity, wage labor means labor motivated by threat of hunger and homelessness. If, occasionally, a wage workers should actually freeze to death, this only tells the rest of the proles to get back to work or they may be next.

In addition to leaving a massive population of almost 100 million workers unemployed, I want to show why current full employment policies actually reduce employment and output, and make society poorer.

The limited goal of current economic policy

As I said before, by GDP, bourgeois simpletons simply mean the aggregate prices of production of all commodities produced during a given period. Generally falling prices (so-called deflation) make it extremely difficult for individual capitalist firms to make a profit; while generally rising prices reduce pricing pressures. At least since 1978-79, conventional policy hasn’t been intended to end unemployment; but to ensure average prices constantly increase in a sustained, controlled fashion to the point where output is maximized. Consequently, “full employment”, as Baker and Bernstein use the term, does not mean zero unemployment, but the absence of a gap  between actual and potential aggregate prices. Reducing this gap to zero is the real aim of full employment policies, not zero unemployment.

Recall how this work, from part I of this series: If 1000 widgets are produced and each has a production prices of ten dollars, the aggregate production prices of all widgets is $100,000. Simple enough, right? Assuming no change in productivity has occurred, 11,000 widgets should sell for $110,000. 12,000 widgets for $120,000. And so on. As the number of widgets increase, the GDP of the country should increase proportionally with it.

Suppose, however, 13,000 widgets only generate a GDP of $120,000 or even $110,000. Aggregate prices of production, i.e., output, has now stagnated or, in the second case, fallen altogether. This is the situation in a recession. In this case, the 13,000 widgets has no more market value than the 12,000 or 11,000 widgets, namely $120,000 or $110,000. Conventional policy calls for the state to intervene in the market, purchase the excess widgets, and so raise aggregate prices. This is what that darling of progressives the American fascist leader, FDR, did for crop prices in 1933 with the Agriculture Adjustment Act: To offset the fall in aggregate market prices of crops below their prices of production, FDR simply bought up the excess crops and burned them.

Raising prices ensures profits

FDR’s AAA is the simplest example of how conventional full employment policies work. The extent to which market prices of commodities diverge from their prices of production is what simpleton economists mean by the term, “output gap”. Conventional “full employment” policies aim to raise market prices to reflect the prices of production of commodities produced by capital. (The production prices of a commodity is defined here as the cost of labor power and other inputs plus an average rate of profit.) By raising market prices on crops, for instance, FDR was able to ensure farmers were able to recover the costs of production plus their profit. As Keynes noted in 1933, within certain limits this can have an indirect impact on the level of employment:

“We have reached the conclusion that there is no means of raising world prices except by an increase of loan-expenditure throughout the world. How to achieve this should, I suggest, be the central theme of the World Economic Conference. There are, I think, three, and only three, possible lines along which we can lend assistance. …  The second, and more promising, means is for the stronger financial countries to increase loan-expenditure at home, on the lines recommended in Chapter II above. For such expenditure will be twice blessed. In so far as it sets up a stream of expenditure on home-produced goods, the favourable repercussions of the initial loan-expenditure on employment will be multiplied. … It will have set the ball rolling.”

Conventional “full employment” policy was never meant to eliminate unemployment primarily, but to ensure market prices of commodities like corn never fall below their prices of production. Such policies are completely inadequate for that purpose eliminating the huge reserve of unemployed persons in our economy. It is the wrong tool for the job of realizing full employment unless the term itself is meaningless.

But if full employment doesn’t mean the actual elimination of all unemployment, at least 100 million of workers for whom wages are the sole means to access food, clothing and shelter are left dependent on family, charity or the completely inadequate American social safety net.

Zero unemployment is possible

As I explained in part II of this post, in times of war or national emergency, fascist states have had no difficulty or hesitation pushing employment well beyond the limited effects of the so-called NAIRU. During these times, workers who were previously thought to be unemployable have easily found a place in the employed labor force. Such was the case, for instance, during the Great Depression when fascist leaders like Hitler and Roosevelt embarked on massive military build ups in preparation for World War II.

The US, for instance, not only employed the huge population of unemployed, it recruited huge numbers of women and farm labor into industry, while expanding the industrial base by more than 1500 new factories in a matter of months. At the same time Washington drafted another 16 million young workers from production and placed them in uniform. Those troops were not only withdrawn from productive employment, they had to be fed, clothed and armed by the rest of the population.

When it was a matter of great urgency to the fascists, the “timid, over-cautious, half-hearted” (Keynes) attitude of the capitalists were brushed aside and full employment was realized to extent never thought possible. The fascists took direct control of production and subordinated the national capital to a common plan, boosting employment and investment and output.

The NAIRU is, therefore, no natural barrier, no law of nature like gravity that prevent the state from reducing unemployment to zero, but an arbitrary limit imposed by Washington on its own policies. The experience of both Nazi Germany and New Deal United States demonstrates there is no inherent barrier to realizing zero unemployment. This means it is possible to draw as many as 100 million additional workers into production who are now locked out of the employed labor force solely because of state policies.

The argument against zero unemployment is misleading

The only reasonable objection to bringing these additional 100 million workers into production is that their addition to the labor force would add no additional output. However this objection is deliberately misleading. Output, as defined by mainstream economic theory, is not additional real goods — cars, houses or shoes — but the aggregate production prices of these goods.  Doubling the number of workers in production may not add to GDP, but, all else held equal, two workers can always produce twice the amount of a real goods as one worker.

If 100 workers, working eight hours a day, can produce 10,000 widgets in a year, all else held equal, 200 workers,  working eight hours a day, should be able to produce 20,000 widgets in a year. Doubling the total labor force may not increase aggregate prices of production of the widgets, but it has no such impact on the actual production of widgets themselves. Further, if 200 workers can produce twice as many widgets as 100, it follows that 200 workers can produce the same quantity of a widgets as 100 in half the time.  If 100 workers, each working eight hours per day, can produce 10,000 widgets in a year, 200 workers, each working only four hours per day can produce 10,000 widgets in a year. For a given real output, doubling the number of workers engaged in production should halve the time necessary to complete it.

State “full employment” policies are not concerned with production of real goods per se, but with the production prices of the goods.  State policy not only tries to maximize GDP, it aims to accomplish this even at the expense of the real production of goods.

Increasing employment increases real output

In fact, my argument above is entirely too conservative: evidence stretching back to the 19th century suggests doubling the productively employed labor force (that portion of the labor force that is actually employed for production of goods, or use values) should more than double real output in a given period of time.  The evidence for this assertion actually is the core of Marx’s discussion of the concept of relative surplus value in Capital, v1, c15.  Based on the actual experience in England following the imposition of a limit on hours of labor, Marx took note of a fantastic 4-fold increase in the rate of expansion of output as compared to the rate previous to a limit on hours. He attributed the increase to four factors:

  • First, by working for a shorter period of time, the workers were able to stay on task and exert greater effort for the entire period.
  • Second, with less room for unnecessary activities, management of the production process by the capitalists was tightened and the process streamlined.
  • Third, capitalists were compelled to reduce waste of constant capital in production in order to control costs.
  • Fourth,  and most important,  the capitalist were compelled to introduce improved machines, scientific know how and technology to raise the capacity of a given quantity of labor power to produce surplus value within the limits of the newly shortened working day.

By imposing a limit on the length of the working day, the state forced capitals to raise productivity in order to produce surplus value. The impact of a shortened working day on productivity of labor was so great Marx predicted the working day would have to be shortened again in the not too distant future:

“There cannot be the slightest doubt that the tendency that urges capital, so soon as a prolongation of the hours of labour is once for all forbidden, to compensate itself, by a systematic heightening of the intensity of labour, and to convert every improvement in machinery into a more perfect means of exhausting the workman, must soon lead to a state of things in which a reduction of the hours of labour will again be inevitable.”

Technology’s impact on employment is a two-way street

There is a lot of grumbling about the impact of technology on the demand for labor, but little or no discussion that this impact is a two way street. To give an example, it is widely held among economic historians that the United States innovation advantage at the turn of the 20th century in large part rested on the fact it suffered a labor shortage.

According to Wikipedia:

“The U.S. economy of the early 19th century was characterized by labor shortages, as noted by numerous contemporary observers. The labor shortage was attributed to the cheapness of land and the high returns on agriculture. All types of labor were in high demand, especially unskilled labor and experienced factory workers. Labor prices in the U.S. were typically from 30-50% higher than in Britain. Women factory workers were especially scarce. The elasticity of labor was low in part because of lack of transportation and low population density. The relative labor scarcity and high price was an incentive for capital investment, particularly in machinery.”

The foregoing examples, taken from the UK and the US in the 19th century, suggests current so-called “full employment” policies not only fail to realize real full employment, which can only be defined a zero unemployment, but, in addition, retard the development of the forces of production and thus leaves society poorer than it otherwise would be. That progressives accept this failed policy as the basis for a program of full employment demonstrates not their commitment to improving the conditions of the working class, but their commitment to wage slavery.